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Explained: How 20% TCS on overseas credit card spends while abroad affects users

While the Union government has justified the hike in the tax collected at source on overseas credit cards claiming it mainly affects the rich, it is being criticised for burdening the middle class.
Representative image of a person using a credit card while typing into a laptop
Representative image of a person using a credit card while typing into a laptop
Written by:
TNM Staff

On Tuesday, May 16, the Union Finance Ministry amended rules under the Foreign Exchange Management Act (FEMA). The new amendment brought payments made through international credit cards, when a person is outside India, under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS). This means that a higher rate of Tax Collected at Source (TCS) of 20% would be charged for foreign remittances and certain purchases by Indians using international credit cards outside India from July 1. The TCS rate earlier was 5%. 

The amendment has excluded payments for overseas education and medical treatment but it will be applicable if they are used to buy a tour package, making such spends expensive. With these developments, travelling abroad is likely to become more expensive if overseas credit cards are used. It will have an impact on people making overseas investments or going abroad for leisure, studies or work. While the Union government has justified the change claiming that it mainly affects the rich, critics say it would make foreign travel expensive and create a burden on middle-income individuals. 

What does the amendment change?

The amendment notified on May 16 brings international credit card spending outside India under the ambit of the liberalised remittance scheme (LRS). This scheme allows all resident individuals to freely remit up to USD 2.5 lakh, or nearly Rs 2.07 crore, in a financial year. The scheme was first introduced in 2004 with a cap of USD 25,000. It has  been revised multiple times since then. Remittances exceeding this limit would need prior approval from the Reserve Bank of India (RBI). 

This ceiling applies to expenses for specific purposes mentioned in Schedule III of the Foreign Exchange Management (Current Account Transactions) Amendment Rules 2015, including private visits to foreign countries, gifts, donations, going abroad for employment, emigration, maintenance of close relatives abroad, business travel, medical expenses, studies abroad, etc. The scheme also excludes certain expenses, such as remittance for trading in foreign exchange abroad, purchase of lottery tickets etc. 

Until now, Clause 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 (or FEM(CAT) Rules) made an exception for payments made using international credit cards outside India. But the recent amendment omitted this particular rule, bringing credit card spending abroad under the LRS. Spending through international credit cards while in India was already covered under LRS, and this amendment doesn’t change that. Payments made through debit cards also came under LRS even before this amendment. 

What’s the deal with TCS?

TCS is a direct tax collected by the seller and deposited to the government. This means if you are travelling abroad and spend Rs 1,00,000, you will now have to pay an additional amount of Rs 20,000 (at 20% TCS) as tax immediately. This makes foreign travel considerably more expensive from July 1, whether you use an international debit card or a credit card. As the Finance Ministry mentioned in its clarifications over the new rules, people can claim refunds on this TCS when filing their income tax returns. 

When the Finance Bill, 2023 was passed in the Lok Sabha, Union Finance Minister Nirmala Sitharaman had said that payments for foreign tours through credit cards were not being captured under LRS and thus escaping TCS. She said the RBI was being asked to bring credit card payments for foreign tours under the ambit of LRS. 

As announced in Budget 2023, in the Finance Act, 2023, TCS rates were hiked from 5% to 20% for remittances made specifically for buying overseas tour packages, and also other purposes such as bonds, shares, real estate gifts, etc. No changes were made to TCS rates on remittances towards medical treatment and education. 

What is the criticism of these changes?

In its clarification, the Union government claimed that the new rules will mainly impact wealthy people and their overseas investments in real estate, stocks, bonds, etc., and also on people spending on foreign tour packages and gifts for Non-Resident Indians. Those who pay income tax can claim refunds, the government said.

The government argues that the exemption for credit cards under LRS was allowing people to exceed the USD 2.5 lakh ceiling on unchecked remittances. “Instances have come to notice where the LRS payments are disproportionately high when compared to the disclosed incomes,” the Finance Ministry said. 

“Data collected from top money remitters under LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of USD 2,50,000,” it said. It also said that differential treatment between debit cards and credit cards had to be removed in the interest of uniformity, and for “capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits."

But the new rules are being criticised for burdening even not-so-wealthy people travelling abroad for work, studies, or leisure — especially the ‘middle class’ — as it makes foreign travel considerably more expensive. Many have also criticised the new rules for lacking clarity, and for potentially making the tax payment and refund process cumbersome and confusing.

For instance, the Finance Ministry has specified that business visits of employees, when expenses are borne by their company, will not fall under LRS. It also said a separate clarification would be issued on how TCS will be levied for expenses on medical treatment or education. Critics and social media users have questioned how the exact purpose of a transaction would be ascertained at the time of the transaction, and the appropriate TCS levied accordingly. 

People have also questioned the government’s justification that the 20% TCS burden would be minimal on those who don’t pay income taxes, without accounting for exceptions such as retired persons with minimal or zero income. 

While the Finance Ministry pointed out that people can claim refunds on the TCS while filing their income tax returns, this could take several months and a considerable amount of money would remain tied up until the refund is processed by the Income Tax Department. 

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